Owners' Page: What Do ESOP Company Boards Do?

Boards of directors can be something of a mystery to employee-owners. Who is on them and what do they do? Do they run the company or just act on a few major issues? Whose interests are they meant to protect?

If you have heard or read about boards, it is probably in the context of public companies (companies whose stock is traded on stock exchanges). These boards are elected by shareholders, although the votes are most often only to affirm the members nominated by the existing board. These boards usually play a major role in the direction of the company, especially on issues like executive compensation, strategy, and finance. The board chair position may be a full-time job.

Boards in non-ESOP, privately held companies, by contrast, are most often just a formality. State corporation laws require companies to have boards, but most privately held companies just have the owner or owners and one of two other people on the board who meet to do whatever tasks the state requires.

Most ESOP companies fall in between these two kinds of boards. The law governing ESOPs does not require ESOP companies to have any particular board structure, but most ESOP companies now have more active boards, and the large majority now have outside board members—people who are not otherwise affiliated with the company. ESOP companies have found that these board members can add perspective and insight to how the company is run while also providing an independent voice on key corporate issues. Companies usually look for board members who have industry experience or are in related businesses, or for experts on strategy, marketing, or culture. The ESOP trustee, who is the legal shareholder in an ESOP, often requires that boards have at least one or two outside members (most boards have 5–9 members). Some ESOP companies also set aside one or more seats for nonofficer employees. Other board members usually include the CEO and often the CFO and one or more other key leaders.

Board Duties

Under state law, boards are responsible to look out for the best interest of shareholders. For instance, if a decision might benefit a few managers but be bad for the company, the board must act in the interests of the company. Board members are required to spend the time to be well-informed about the company’s operations, its financials, and its
goals. ESOP company board members have the additional duty of appointing the ESOP trustee and making sure the trustee is doing a good job in protecting the interests of plan participants. The most important element of this is making sure the trustee properly oversees the process for determining the share price each year.

Boards in Action

Most boards meet quarterly, although some meet more or less often. Meetings last a few to several hours. In between meetings, there may be meetings of smaller board committees on particular issues such as strategy or compensation, as well as occasional brief meetings to deal with issues that come up. Board members receive regular updates on finances and significant business developments.

Do Boards Matter?

Some ESOP boards are more active than others. A really effective ESOP company board can help provide ideas and feedback that help the company grow. But it is important to understand that boards do not run the company in the conventional way that is understood. The board structure in most ESOP companies does, however, provide an added layer of professionalism to ESOP companies that most private companies do not have.

Board Duties Include:

1. Governing the organization by establishing and approving broad plans, policies, and objectives. This means boards are looking at issues like long-term strategy, including new product and marketing initiatives. For the most part, boards are providing feedback on what management proposes. They are responding to these ideas at a high level, usually not getting involved in the specifics of how the company is run. Board members don’t often have the required knowledge about the company to do that.
2. Assuring that financial results are achieved within legal and ethical guidelines. In ESOP companies, this is more complicated than in other companies, because ESOP companies have to show they have the financial resources to buy back stock from employees after they leave or when they diversify their accounts. Boards need to make sure the company has adequate resources and plans to pay this repurchase obligation while still being able to operate the company profitably.
3. Responding to offers to buy the company. When a serious offer to buy the company is made, boards play a more active role than they do on day-to-day issues. Boards have to decide if the offer is in the best interests of plan participants as shareholders, not employees. That is because the law governing ESOPs is focused on building retirement asset value for employee-owners. Boards have wide latitude, however, to choose whether to respond to offers, so that very, very few ESOP companies are sold when most of the people who work there would see it as bad idea.
4. Reviewing the performance and setting the pay for the top executive officer or officers. Outside boards members usually have a major role in this process.
5. Reviewing monthly financial reports and variances to help understand if the company is on track to meet its goals.
6. Deciding on proposals from management to buy other companies, something that is happening with increasing frequency in ESOPs.
7. Reviewing corporate culture. This is a duty only some boards choose to take on but given the importance of this in an ESOP company, it arguably should be a major focus.
8. Nominating members of the company board and asking for their approval by the ESOP trustee.